The European commission – which oversees European Union law as the EU's executive arm – on Wednesday gave Luxembourg 30 days to increase its VAT rate on digital services from 3% to 15%. This will close a tax loophole that has encouraged companies such as Amazon, Skype and Netflix to be based in Luxembourg to benefit from the 3% rate when selling throughout the EU. Luxembourg must agree to change its VAT rate before the end of November, or face being referred to the European court of justice and risk fines. France has also been issued with a similar warning over its 7% rate for digital services.

Amazon is expected to contest the commission ruling, so there will be no immediate impact on the cost of ebooks bought from its UK website.

Luxembourg, with the lowest standard VAT rate in Europe, has been successful at attracting many global e-services providers. Under EU rules these companies are able to charge consumers across the EU the reduced Luxembourg VAT rate for these services. The home state of the consumer who makes the purchase receives no tax revenues.

Charging ebooks at the 3% rate gives firms such as Amazon a huge competitive advantage over UK ebook retailers, which have to charge the local rate.

The commission issued infringement proceedings in July against Luxembourg and France on the grounds that their policy was incompatible with EU law. The next step, a reasoned opinion, was published on Wednesday. Luxembourg and France will rely on the defence that there is an anomaly in EU VAT law which allows paper books and newspapers, for instance, to be charged at a reduced VAT rate; but digital must be charged at the standard, higher rate of the country in which the company is based.

The commission, which is being pressured by national online booksellers which lose out to Amazon's better margins on digital sales will demand that member states cannot act alone and must seek unanimity amongst all 27 states. Richard Asquith, Global Head of VAT, TMF Group, the indirect tax consultancy, said: "Countries across the EU have been breaking ranks by charging cut-rate VAT on services sold across borders. Luxembourg's move at the start of 2012 to cut its ebook rate to only 3% to help attract and retain the media industry has been copied by France, and I expect Belgium to do the same. The UK has held out at the full 20% VAT rate, which has a detrimental impact on the UK industry. The EC's move will seek to end these anomalies and tax competition amongst member states, and comes under pressure from member states' ministers of finance."

The EU's move against Luxembourg will please the British publishing industry. British authors and publishers are fearful that Amazon's market dominance will send the industry into decline with consumers facing a smaller and less varied choice of books from fewer authors on sale in fewer retail outlets.

Amazon is able to wield such power over publishers because it has a near monopoly of the UK digital book market. According to industry estimates, it sells 90% of all ebooks in Britain, while using its Luxembourg tax status to squeeze profitable terms from publishers.

According to a contract seen by the Guardian, Amazon starts negotiations with its publishers on the basis that the UK VAT rate of 20% must be knocked off the cost price. However, its base in Luxembourg allows it to benefit from the European tax anomaly and pay VAT at 3%. This means that Amazon can charge the difference between the UK VAT levy imposed on publishers and the 3% it actually pays, creating a supplementary profit of £1.38 a £10 ebook in Britain. It then negotiates further substantial discounts on top of the VAT subsidy, which can result in Amazon seeking a discount of up to 65% on ebooks including the phantom VAT charge.